Different From You & Me

By

Gene Epstein

Updated Jan. 29, 2001 12:01 a.m. ET

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C all it the eternal case of the sated plutocrat versus the greedy proletariat. When Abby Joseph Cohen declared in this year's Barron's Roundtable (January 15 ) that "consumers are now feeling largely satisfied" ever since their three-year binge of buying "housing and autos" came to an end in "early 2000," the Goldman Sachs chief investment strategist surely put herself in aristocratic company.

Alan Greenspan made a very similar point in his July testimony before congress last year. People are all consumered-out with "cars and light trucks," "new homes," and other "durable goods," said the Maestro -- and are apparently ready for an extended vacation from the malls, showrooms and real-estate offices.

Did this thundering thought strike our central banker in the back of his chauffeured limousine, while he was being whooshed home to his own luxurious digs in Georgetown? It would be fun to conjure with that irony. I'm told, though, that this theory of consumer satiation has been one of his pets ever since his days at Townsend-Greenspan.

The Fed chairman also put himself in aristocratic company. Henry David Thoreau said it best. Chiding his fellows for those habits of getting and spending that took time away from communing with nature, he famously wrote, "The mass of men lead lives of quiet desperation." Striking a similar note, the poet William Wordsworth wrote incandescently, "Getting and spending, we lay waste our powers: Little we see in Nature that is ours."

But easy for them to say: Wordsworth came in to property, and his sister did all the housework. Thoreau remained a bachelor all his life, with just himself to support, and he often sponged on well-heeled friends like Ralph Waldo Emerson.

The conceptual war on the consumer may have reached its zenith with the publication of John Kenneth Galbraith's 1958 bestseller, The Affluent Society . In a celebrated chapter called "The Dependence Effect," the Harvard economist attacked the very idea of even producing for certain kinds of wants he found wanting.

"One cannot defend production as satisfying wants," he declared, "if that production creates the wants." The whole point, then, was that if "production, not only passively, through emulation, but actively through advertising and related activities, creates the wants it seeks to satisfy," then best to forgo it in favor of more government spending. (Echoes of a far better writer than Galbraith -- Shakespeare, in fact -- who once wrote of Cleopatra: "She makes hungry where she most satisfies.")

So let's see, now: Since ads and word-of-mouth must have motivated people to buy copies of The Affluent Society , then its print run should have been cut. And since the author's skiing trips to Switzerland must have begun from information he gleaned elsewhere, then the funds allocated for such "dependent" junkets should have been confiscated by a needy public sector.

As F. A. Hayek witheringly commented in his 1961 essay, "The Non Sequitur of the Dependence Effect": "The innate wants are probably confined to food, shelter, and sex" -- and, we might add, clothing in cold climates. "All the rest we learn to desire because we see others enjoying various things. To say that a desire is not important because it is not innate is to say that the whole cultural achievement of man is not important."

A related form of hypocrisy emanates from Harvard sociologist Juliet B. Schor's 1998 manifesto, The Overspent American (a sequel to her earlier book, The Overworked American ). To be fair, Schor refrains from positing obnoxious economic laws a la Galbraith, and she does make the obvious point that some people are shopaholics in similar fashion to the way others abuse drugs, food and sex. That's what we have Debtors Anonymous for.

But Schor's real point seems to be not that Americans spend too much, but that they don't spend enough in the manner of, say, a well-heeled Harvard professor with tenure. "If you start a new sport," she admonishes, "ask yourself how much you'll eventually pay out for equipment, lessons, and fees." But later, she advises us to fill the "void" left from "downshifting" our spending habits with activities like "writing books" and "gardening" -- adding that, even though gardening can be "terribly expensive... with all the money you're saving, you can afford to splurge on something you really love."

Well, yes: like on starting a new sport, or owning a new sports car, or acquiring a wide-screen TV to watch sports being played -- or even on moving into a home that actually has enough room for a garden.

Message to Greenspan and Cohen: Median household income, pre-tax, is still about $43,000 a year. As I needn't tell you, this means that half the nation's households earn more than that amount and half less. The bottom four-fifths of households receive a pre-tax income of about $88,000 or less. The vast majority of households in the bottom four-fifths can't afford to own a new car, but buy used instead; and about 40% don't own a home to begin with.

But as long as the real income of this bottom four-fifths keeps rising, we can be fairly certain that their appetite for consumer durables will continue apace. In the fourth quarter, average hourly earnings advanced at a record rate.

Another hostile reader, similar to the one whose pesky questions hogged this space last week, caught me as I was trying to sneak past him through the turnstile, this one brandishing a copy of Maestro. Our edited Q&A follows.

Q : I'll bet you're sorry you didn't write this book.A : No, not at all. Watching the Charlie Rose show a couple of weeks ago, I noticed that none other than Bob Woodward was about to come on to share his thoughts about Greenspan's easing of the fed-funds rate. The thought of listening to him opine made it a little difficult for me to keep down my dinner, so I switched to a movie.

Q : Like I say, sour grapes. The title has put a new word in the language.A : I suppose it has. But Greenspan's no maestro. If he plays any role in the economic orchestra, he's more like first fiddler. He fiddles every which way, hoping he'll get the rhythm right, and often enough he doesn't. But he was truly masterful before the Senate Budget Committee last week. I did think he put one point very well in the Q&A. Referring to recession, he remarked that "there is something different in a recession from other times in the economy. It is not a continuum from slow growth to negative growth. Something happens." That phrase "something happens" is hardly a maestro talking. But it's probably very true. We really don't know what causes recessions, or exactly when they're about to occur. So it's hard to challenge his better-to-be-safe-than-sorry approach to cutting rates.

Q : You want to have it both ways! Either we're slipping into recession, or we're still in a boom! Or don't you think we're still in a boom anymore?A : No, I do think so. For more about that, try my short piece in the follow-up section of this week's issue. But in a way you're right. I just think it's very possible that the Fed chairman's action may have saved us from the kind of break in confidence that might have brought a downturn, while putting us back on track for another year of this consumer-led boom.

Q : Consumer-led? How can the consumer lead anything with the personal savings rate at zero?A : In the first place, the savings rate of those income earners who range in age from 25 to 65 probably remains pretty positive. At least, the consumer expenditure survey showed it was positive for those age groups in 1999, when the officially measured personal savings rate was not far above where it is now, at only 2.2 cents on the dollar. The savings rate is running negative only for the age groups at both ends-the young and the old. But the young get supported with cash from their parents, while the old are able to sell off their assets.

Q : So there again, there's nothing to worry about?A : Not if the worry is that consumers don't currently have the wherewithal to increase their spending. You know, the whole idea that habits of thrift have become extinct is basically untrue. The only difference is that, since the Greatest Generation came of age during the Great Depression, they really did have habits of thrift instilled into them. Our generation has something else, and it's called retirement accounts. The IRS offers us a way to save on our taxes by signing up for them, and once we do, the savings just happen to us automatically.

Q : But the savings rate is down anyway.A : Yes, it is. But here the difference is that, the factors that served to reduce it in our parents' day have all been operating at the same time. One is the surge in home buying. Another is what until a year ago was the greatest bull market in history, which has produced an unusual flow of income from realized capital gains, a flow that may actually have increased in last year's selloff. And the problem is, while the official measures properly define savings as the difference between after-tax income and consumer spending, they don't include capital gains in that income. While debiting you for the tax. So imagine you have an income of $100,000, leaving you $70,000 in after-tax income, out of which you consume $60,000. That means you're saving $10,000. But now assume you realize a $50,000 capital gain, on which you pay a tax of $10,000. Now you're left with only $60,000 in after-tax income, and since you still spend $60,000 on consumption, your savings is now computed as zero.

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